IRS releases guidance on Roth catch-up contributions under SECURE 2.0
The IRS has provided additional guidance in Notice 2023-62 (Notice) regarding catch-up contributions under SECURE 2.0 Act (Act) section 603. Section 603 of the Act eliminated catch-up contributions after Dec.31, 2023, and required employees with income exceeding $145,000 (as indexed annually) to make any catch-up contributions on a Roth (rather than pre-tax) basis for tax years beginning after Dec. 31, 2023. Guidance provided in the Notice provides a two-year extension of the effective date for catch-up contributions being on a Roth basis for high income individuals and confirms catch-up contributions are available for tax years after Dec. 31, 2023.
IRS releases guidance on Roth catch-up contributions under SECURE 2.0
Two-year extension of Roth catch-up contribution requirement
Individuals who are age 50 or older, and who are participants in a retirement plan that allows deferral contributions (e.g., 401(k) and 403(b) plans) can elect to defer additional amounts into their retirement accounts, if allowed by their plan. The Internal Revenue Code refers to the extra contributions as “catch-up” contributions. Employees can make catch-up contributions on a pre-tax basis or, again, if allowed by the plan, as after-tax Roth contributions.
Section 603 of the Act added a new requirement that high-income individuals must make their catch-up contributions on a Roth basis. High-income individuals for this purpose are employees with wages more than $145,000 paid in the prior calendar year by the employer that sponsors the plan. Wages considered for this threshold are those subject to the Federal Insurance Contributions Act (FICA). Mandatory Roth treatment of catch-up contributions for high income individuals was set to start in tax years beginning after Dec. 31, 2023. Employers, plan recordkeepers, payroll companies and various industry and professional groups all expressed concerns about the abbreviated time under the Act for developing the necessary changes to plan documents, employee communications, and administrative procedures necessary to implement the change in the law.
In response to those concerns, the IRS in the Notice granted a two-year delay for the required implementation date, which is now for plan years beginning after Dec. 31, 2025. That means until the 2026 plan year, plan sponsors may continue to administer catch-up contributions without regard to the new Roth requirement.
Clarification on catch-up contributions after 2023
As drafted, Act section 603 ended catch-up contributions entirely for tax years beginning in 2024 due to a drafting error which removed section 402(g)(1)(C). This clearly was not the intent of Congress as the purpose of adding the Roth catch-up contribution requirement was for tax revenue generation. Stakeholders have been awaiting legislative action or confirmation from the IRS that catch-up contributions would still be permissible after Dec. 31, 2023. The Notice confirms that the IRS interprets the conflicting provisions of the Act in favor of catch-up contributions continuing to be available.
Individuals who are age 50 or older will be able to continue making extra contributions to their retirement plans as either pre-tax or Roth catch-up contributions. The ability to make these extra contributions are a significant benefit when planning for retirement. The annual deferral limit for 2022 is $22,500, rising to $30,000 after including the maximum catch-up of $7,500.
The Notice also confirmed that the elimination of section 402(g)(1)(C) does not change the applicability of section 402(g)(1)(A) or 402(g)(1)(B). Therefore, an individual’s deferral subject to the annual deferral and catch-up limits continue to be based on contributions made to all retirement plans, regardless of whether the individual’s made their deferrals and catch-up contributions to plans sponsored by the same employer or unrelated employers.
Outstanding considerations: more guidance forthcoming
The Notice’s transition relief is very helpful, but plan sponsors will still need guidance from IRS on matters such as:
1. The applicability of mandatory Roth treatment for catch-up contributions to self-employed individuals and governmental employees.
Self-employed individuals and certain governmental employees do not receive wages subject to FICA. Therefore, a question is still open as to whether these individuals would be subject to mandatory Roth treatment of catch-up contributions.
2. How an employer should treat an individual’s election to make catch-up contributions on a pre-tax basis if the employee exceeds the threshold for mandatory Roth treatment of catch-up contributions.
The Act provided that the Treasury may release regulations addressing how a plan sponsor is to treat an employee’s election to have catch-up contributions made on a pre-tax basis if they exceed the income threshold requiring Roth catch-up contributions. The Act and Notice did not address whether 1) the plan sponsor may overturn the employee’s election and automatically convert the pre-tax catch-up contributions to Roth catch-up contributions or 2) whether the plan sponsor would need to treat a pre-tax catch-up contribution election as void once the individual exceeds the income threshold and have the employee make a new election to treat their catch-up contributions as Roth contributions. There is also currently no guidance surrounding any necessary communications by the plan sponsor to affected employees who exceed the income threshold.
The Notice confirms that catch-up contributions are here to stay and were not eliminated. Also, the transition period for the mandatory treatment of Roth contributions for high-income individuals shows the IRS’s intent to issue further guidance on unresolved issues surrounding implementation of that provision. Employers and recordkeepers received more time to amend their plan documents to implement mandatory Roth treatment of catch-up contributions for certain high-income individuals. As more guidance is provided, employers should continue to work with their recordkeepers and legal counsel, as appropriate, regarding amending their plans and implementing the proper testing and checks to ensure the Roth catch-up contribution income threshold is followed.
This article was written by Anne Bushman, Bill O’Malley, Christy Fillingame, Lauren Sanchez and originally appeared on 2023-09-05.
2022 RSM US LLP. All rights reserved.
The information contained herein is general in nature and based on authorities that are subject to change. RSM US LLP guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. RSM US LLP assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein. This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/aboutus for more information regarding RSM US LLP and RSM International. The RSM(tm) brandmark is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.